Sergei Chertkov leafs through a stack of documents with a heavy sigh. In the regional administration building in Konstantinovka paper has replaced emails in recent days; the computers have been stored in a safe place so that they cannot be looted if the building is seized by armed rebels.

The mayor fled the town (officially on "sick leave") after the town hall was seized by the fighters of the self-proclaimed Donetsk People's Republic a week ago, while Chertkov and his regional administration are still standing, for now. But the situation in Konstantinovka is a microcosm of what has happened across south-east Ukraine in recent weeks.

After a week in which dozens of people died in clashes between the separatists and the Ukrainian army, the region is standing at the precipice of full-blown civil war. On Thursday the separatists insisted they would go ahead with a referendum on independence planned for Sunday, despite Russian president Vladimir Putin's surprise call to postpone it.

Konstantinovka, a town of about 75,000 people 40 miles away from the regional centre of Donetsk, has, like most towns in the area, been engulfed by the uprising that swept the region following the February revolution in Kiev, which led to President Viktor Yanukovych fleeing Ukraine and the formation of an interim government that Moscow has labelled as "neo-fascist".

The town hall was seized 10 days ago and is now surrounded by several barricades and occupied by a motley assortment of Kalashnikov-wielding rebels. The police have melted away; some of them have even joined the opposition. Roadblocks have been set up around the town, a siege mentality has taken hold, and dissident voices have either been violently silenced or melted away in fear. "A month ago, nobody could ever have imagined this would happen," says Chertkov, shaking his head in disbelief.

Men help with the placing of concrete blocks to form a barricade. Photograph: Vasily Maximov/AFP/Getty Images

There are real issues that worry the local population. The interim government blundered when it repealed a Yanukovych-era language law that gave Russian special status in certain regions, and even though the move was soon rescinded the damage had been done. The horrific deaths in Odessa last week of more than 40 pro-Russian protesters, in a fire that came after violent clashes with pro-Ukrainians, have been portrayed as a fascist massacre by Russian television, and used to enhance grievances in the region.

But the economic situation has also provided fertile ground for fear and discontent. Unlike many of the coal-mining towns elsewhere in the Donbas region, Konstantinovka has always been known for its glass production. At their peak, during the Soviet period, the town's three glass factories employed more than 15,000 people between them. They produced the red stars that stand atop the Kremlin towers in Moscow, and the glass for Vladimir Lenin's sarcophagus, housed in his Red Square mausoleum. In the late 1980s the factories produced over 150m glass bottles a year, to package sweet Crimean imitation champagne and send them far and wide to celebrate birthdays and weddings across the Soviet Union.

But the party is long over. Now, the factories lie in ruins around the outskirts of town. Just a few workshops are still operational, employing a mere 600 people. Even the centre of town is decaying. The asphalt on the roads is cracked, and huge weeds sprout across the pavements. The stone models of a bright yellow camel and of Snow White and the seven dwarfs in the central park look somewhat sinister, surrounded by knee-high grass that has not been cut for months. Remove the people and it might be Pripyat, the Ukrainian city that was evacuated in the wake of the Chernobyl disaster and is now a ghost town.

Unemployment is high, and on a weekday morning many people are drinking. A lot of the town's menfolk have gone to Russia to make money. "For 23 years we have been living on what we got from the Soviet Union," says Chertkov, who like most politicians in the region is a member of Yanukovych's Party of Regions. "Nothing new has been built, nothing has been modernised. Many people are upset and angry with their fate."

Alexander Melanchenko, a doctor and previously a pro-Ukrainian member of the local parliament, who has left the town, says that local officials themselves started the panic in the town back in December, when the Maidan protests started in Kiev. "They started whipping up fear about Ukrainian nationalists and fascists coming from western Ukraine, in order to solidify their own support base; they had no idea that the whole thing would be seized on by the Russians and blown out of all proportion. Now they too are scared. They don't want to lose all the money they have amassed."

"This is a region of workers, a region where people traditionally think in a collectivist way, and it is very easy for myths to take hold here," says Yuri Temirov, a history professor at Donetsk National University. "The Party of Regions started to create tension starting from the end of last year, telling all these scary tales of fascists. This set the tone, and everything was seized by a well-organised campaign bigger than anyone could have imagined."

On Thursday, outside the local administration building, some of the fighters are dressed in camouflage while others wear hoodies and balaclavas. All carry guns – a mixture of pistols and Kalashnikovs.

"You are a lying fascist supporter," one of the men tells a reporter, delivering a recurrent message in an unusually polite way. "We only give information to Russia Today and perhaps the Chinese. We know who you are and who you work for."

Eventually a group of fighters agree to speak, though they do not give their names. They insist that everyone inside the building is local, and say nobody has come from Russia. Their commander, they say, is a local lathe operator, who in turn takes his orders from the headquarters of the Donetsk People's Republic. They refuse to say where they got their weapons, but sources in the town said they were seized from, or donated by, the local police force.

"The referendum will go ahead whatever, and we can never again live with Ukraine," says one. "We lost too many friends in the fighting in Slavyansk for us to go back to where we were before."

The barricades around the occupied town hall are adorned with signs decrying the lying western media and politicians. The men do not allow entry into the building, but it is possibly a smaller version of the rebellion's headquarters in Donetsk, housed in an 11-storey building which has everything from a press service to a cell where a number of hostages are believed to be detained. In Donetsk, the walls in the stairwell are plastered with similarly sinister messages. Some depict the Ukrainian interim government as prostitutes or Nazis, while others display the photographs of pro-Ukrainian activists in the city, giving their social network pages and often phone numbers or addresses.

Conversations between fighters outside the headquarters in Konstantinovka also suggest a situation of vigilante justice in the region, as the police have effectively ceased to function. "Brought a junkie in last night, and put him down on his knees. He shouldn't give you any trouble now," one Kalashnikov-toting fighter said to another with a smile.

There has been little fighting in the town, although there was a gun battle when the Ukrainian army retook the local television tower, and many of the fighters spend their days at roadblocks, of which there are dozens in the town and on surrounding roads, fashioned out of stacked walls of tyres, sandbags, tree trunks and barbed wire.

Just who happens to be manning a road block at any given time is a matter of pure luck, and for drivers akin to playing Russian roulette. A checkpoint that one day is guarded by ex-soldiers who may carry automatic weapons but handle themselves politely and professionally can the next day be manned by wild-eyed youths in tracksuits, wielding baseball bats.

After nightfall, the checkpoints become dangerous as their guardians are gripped by intoxication and anxiety. Passing through Konstantinovka one evening earlier this week, US journalist Simon Shuster was stopped at a roadblock, and when one of the men on duty spotted a flak jacket in the boot, Shuster was pulled out of the car without a word, cracked on the skull with the butt of a pistol and kicked, before being driven off to a detention facility in another city covered in blood.

After those with authority among the separatists realised a journalist had been injured, Shuster was freed. Reassuringly, the man who had inflicted the damage was even tracked down and detained; less reassuringly, Shuster was invited to witness or participate in some kind of retribution against the rogue element. He declined to attend.

Since the unrest started there has been an uneasy atmosphere of threats and violence. A fortnight ago – even before the town hall was seized – the offices of the local newspaper Provintsia were attacked at night with molotov cocktails. The next week the journalists still managed to put the paper out, but the entire print run was seized by armed separatists. Their crime was to print articles sceptical about the Donetsk People's Republic; the newspaper was denounced as pro-fascist.

Two members of Svoboda, which is indeed a far-right Ukrainian movement, were kidnapped from their homes in Konstaninovka more than a week ago by armed men who smashed down the doors to their homes, beat them, threw them into the boots of cars and drove off. Nothing has been heard from them since, though it is believed that they are being kept in the seized security services building in Slavyansk. "They were members of Svoboda, but they did not lead an active political life or threaten anyone in any way," says Melanchenko. There is a witch-hunt for the few independent journalists and activists, say several people who have fled the town – they hope only temporarily – and who did not want to be named. Given the distinct lack of any actual fascists descending on Konstantinovka, a fifth column within the town had to be found. Receiving the message loud and clear, everybody else with doubts decided to keep quiet.

"Many people in Konstantinovka are horrified with what is happening, but they are scared to speak out. Because a few people are shouting loudly, you can get a false impression that they are the majority," says Melanchenko.

Nevertheless, events in Odessa, Ukrainian military operations and the designation of the separatists as "terrorists" have all brought more and more people over to the side of those fighting. On Thursday a steady stream of locals brought donations of food to the occupied town hall; an elderly lady gave what she said was her last 10 hrivnya (50p) to the cause.

The rhetoric on both sides has become disturbingly uncompromising, with the dehumanisation and humiliation of the enemy that usually precedes civil wars. Both Russian and Ukrainian media report outrageous rumours about the other side as fact. Among ordinary people Ukrainians are routinely described as fascists, while Ukrainians insist that there is no civil war, only a Russian-sponsored terrorist movement – ignoring the depth of feeling among large swaths of the population who support the armed opposition.

Ukrainian social media have started calling the pro-Russian protesters koloradiki, referring to the orange and black stripes of the colorado beetle, the same colours as Russians wear to commemorate the second world war victory, which have become a symbol of the uprising.

And while the pro-Russians have taken hostages in the most disturbing fashion, the behaviour of pro-Ukraine forces is exacerbating the situation. On Tuesday, pro-Ukrainian forces detained Igor Kakidzyanov, the self-proclaimed "defence minister" of the Donetsk People's Republic. A day later, radical Ukrainian politician Oleg Liashko posted photographs on his blog of him personally interrogating Kakidzyanov, who had been stripped to his underwear and had his hands tied behind his back. Human Rights Watch castigated official Kiev for making no comment on what it called an "outrageous situation".

On Friday Ukraine will be on high alert as eastern Ukraine celebrates Victory Day, a commemoration of the losses suffered by the Soviet people during the war, which has been turned into something of a national rallying idea by Putin in Russia. In Donetsk region it has added piquancy this year, given the supposed fascist threat from Kiev.

In the village of Ilyicha, a former collective farm named after Vladimir Leninjust outside Konstantinovka, the local head, Irina Bondar, was organising an early celebratory lunch for local war veterans. One 93-year-old veteran, and more than a dozen "war children", sat at a long table laid with cold cuts and bottles of vodka, and were serendaded with wartime songs by local children dressed up in their smartest clothes.

On her way to her lunch, Bondar had encountered a tricky situation with the separatists – early on Thursday morning they decided to build yet another roadblock on the road that runs through her village. Bondar, a jovial matriarch who invariably embraces her interlocutors, hurried to the spot and told them she would have no such thing in the middle of her village.

"We are working people here, everyone works hard, you can't make it harder for them to get to work," she scolded them, and the rebels demurred immediately, moving their checkpoint and their weaponry elsewhere.

Nevertheless, Bondar, like most others in the village, sympathises with the so-called resistance movement. "They are good lads; they are our lads. They are normal people who want to defend us."

Despite Putin's comments, she says the referendum will take place in the village on Sunday. There will be no polling station, due to the threat of "provocations from Kiev", she says. Instead, urns will be carried from house to house. "I am for a united Ukraine, but what has been happening there recently is out of control. I think we would be better off with Russia."

After the singing and the vodka toasts a local nurse, who is the village representative of the opposition, tells the assembled veterans that the region again faces the threat of fascists, and again will win. Everyone stands, and sings rousing victory songs.

Some of the elderly are overjoyed at being the centre of attention, others seem overwhelmed.

Nadezhda Makarova was five years old when Russia began fighting Nazi Germany in 1941. Now almost blind, hardly able to walk, and with shaking hands, the 78-year-old sits through the performances with tears rolling down her cheeks.

"Will there be another war?" she asks repeatedly, every few minutes. "I am scared. On television it's war, war, war. Everyone is talking about war, and I am scared there will be another one. Let God stop it, please, nothing is worse than war."

With Putin's surprise call to postpone their referendum there was relief in the west that Ukraine might return from the brink. But many in the east feel there is now no way back, and it is possible that the anger stirred up here will be very hard to dampen again.

"We are on the brink of an uprising of poor against rich, of chaos, of a terrifying rebellion," says Chertkov, the regional administration head. "America, Russia, Europe, the politicians in Kiev, everyone has tried to play their games here, and they have played so hard that now we are on the brink of catastrophe."